UPM Annual Report 2020

4.1 Property, plant and equipment

Major capital commitments at 31 December

Impairment testing Carrying values of individual items included in property, plant and equipment are reviewed at each closing date to determine whether there is any indication of impairment. The carrying value is written down immediately to the asset’s recoverable amount if the carrying value exceeds the estimated recoverable amount. Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. The recoverable amount is determined as the higher of an asset’s fair value less costs to sell and its value in use. Value in use is determined by discounting future cash flows expected to be generated by the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets, other than goodwill, that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Where an impairment loss is subsequently reversed, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but the increased carrying amount will not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. The estimations of useful lives, residual value as well as depreciation and amortisation methods require significant management judgement and are reviewed annually. Management makes estimates on the future cash flows expected to result from the use of the asset and its eventual disposal. While management believes that estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect valuations. The long useful lives of assets, changes in estimated future sales prices of products, changes in product costs and changes in the discount rates used could lead to significant impairment charges. Estimates are also made in an acquisition when determining the fair values and remaining useful lives of acquired intangible and tangible assets. Key estimates and judgements

EURm

2020 2019

LAND AND WATER

MACHINERY AND EQUIPMENT

OTHER TANGIBLE ASSETS

CONSTRUC TION IN PROGRESS

New biorefinery / Germany CHP power plant / Germany New pulp mill / Uruguay

471

—

EURm

AREAS BUILDINGS

TOTAL

67

95

2020 Accumulated costs

2,139

2,684

797

3,423 -2,577

13,182 -11,318

839 -714 125 134

724

18,965 -14,649

Renovation and modernisation / Kuusankoski hydro power plant Paper machine conversion / Nordland paper mill

16

19

Accumulated depreciation and impairments

-39

—

—

15

Carrying value, at 31 December Carrying value, at 1 January

757 761

846 948

1,864 2,006

724 235 776

4,316 4,083

Impairment losses In June 2020, UPM announced the plan that it has started a consultation process for the potential closure of the UPM Jyväskylä plywood mill in Finland. With the plan to permanently close the mill, UPM recognised impairment charges of EUR 8 million in the Plywood business area. In August 2020, UPM announced the plans for the permanent closure of the UPM Kaipola paper mill in Finland. The mill was permanently closed in early January 2021. With the permanent closure of the mill, UPM recognised impairment charges of EUR 53 million in the Communication Papers business area. In June 2019, UPM announced the decision to permanently close paper machine 10 at UPM Plattling, Germany. With the closure of the paper machine, UPM recognised impairment charges of EUR 1 million in Communication Business area. In September 2019, UPM announced that it plans to permanently close SC paper machine 2 in Rauma, Finland. EUR 12 million impairment charges were recognised in Communication Papers business area. Property, plant and equipment Property, plant and equipment is stated at historical cost. Costs of assets of acquired in business combinations are determined at fair value at the acquisition date. Depreciation is calculated on a straightline basis and the carrying value is adjusted for impairment charges, if any. The carrying value of property, plant and equipment on the balance sheet represents the cost less accumulated depreciation and any impairment charges. Borrowing costs incurred for the construction of any qualifying assets are capitalised during the period of time required to complete and prepare the asset for its intended use. Other borrowing costs are expensed. Major renovations are capitalised and depreciated over the useful lives of the related asset. Ordinary expenses for repairs and maintenance are expensed as incurred. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in other operating income and other operating expenses, respectively. Accounting policies

Additions Disposals

48

—

4

1

829

-1

-5

—

—

— — —

-7

Depreciation Impairment

—

-73 -27 30

-292

-18

-383

-8

-34

-1

-70

Reclassifications

—

235

16

-280

1

Reclassifications to assets held for sale

3

-3

-3

—

—

-2

Translation differences

-45

-26

-52

-6

-7

-136

Carrying value, at 31 December

757

846

1,864

125

724

4,316

2019 Accumulated costs

796

3,522 -2,574

13,579 -11,574

870 -737 134 127

235

19,002 -14,919

Accumulated depreciation and impairments

-35

—

Carrying value, at 31 December Carrying value, at 1 January

761 740

948 992

2,006 2,096

235 159 316

4,083 4,115

Additions Disposals

14

7

10

3

351

— — — —

-5

-1

—

— — —

-6

Depreciation Impairment

-72

-303

-17

-392

-1

-12

—

-13

Reclassifications

22

205

20

-246

—

Reclassifications to assets held for sale

-3

-2

-6

—

—

-11 40

Translation differences

10

8

15

1

6

Carrying value, at 31 December

761

948

2,006

134

235

4,083

Capital expenditure Capital expenditure, excluding acquisitions and shares, amounted to EUR 902 million (378 million) in 2020. In January 2020, UPM announced that it would invest EUR 550 million in a 220,000 tonnes next-generation biochemicals biorefinery in Leuna, Germany. The facility is scheduled to start up by the end of 2022. In January 2019 UPM announced that it would invest in the refurbishment of the Kuusankoski hydropower plant in Finland. The average annual production of the Kuusankoski plant is expected to increase from the current 180 GWh to 195 GWh. The investment will be completed by the end of 2022. In July 2019 UPM announced that it would invest USD 2.7 billion in a 2.1 million tonne greenfield eucalyptus pulp mill near Paso de los Toros in central Uruguay. Additionally, UPM will invest approximately USD 280 million in port operations in Montevideo and USD 70 million in local investments outside the mill fence, including a new residential area in Paso de los Toros. The mill is scheduled to start up in the second half of 2022. In October 2019 UPM announced that it would invest EUR 95 million in a Combined-Heat-Power (CHP) plant at the UPM Nordland paper mill in Germany. The plant is planned to go on grid in Q3 2022. The annual cost savings of more than EUR 10 million will start as of 2023.

The investment is estimated to decrease UPM's CO 2 -footprint by 300,000 tonnes. In April 2018 UPM announced that it would rebuild Paper Machine 2 at its Nordland mill in Dörpen, Germany, and convert it from fine paper to glassine paper production. The machine was equipped with new finishing equipment and started producing glassine paper in Q1 2020. The capacity after the rebuild is 110,000 tonnes per year. The total investment in Nordland is EUR 124 million. Capitalised borrowing costs In 2020, the borrowing costs capitalised as part of non-current assets amounted to EUR 4 million (4 million). Amortisation of capitalised borrowing costs was EUR 3 million (3 million) and the average interest rate used 1.31% (7.19%), which represents the average costs to finance the projects. In 2020, capitalised borrowing costs were mainly related to the construction of the new pulp mill in Uruguay. Government grants In 2020, government grants recognised as deduction of non-current assets totalled to EUR 5 million (1 million).

ASSESSED USEFUL LIVES Land, not subject to depreciation

NUMBER OF YEARS

-

Buildings

20-50 20-30 15-20 10-15

Power plants

Heavy machinery Light machinery

Equipment

5

170

UPM ANNUAL REPORT 2020 UPM FINANCIAL REPORT 2020 55 171

UPM ANNUAL REPORT 2020

UPM FINANCIAL REPORT 2020 54